Farmland on the rise:
2011 brought big increases in tillable land prices

This rural farm scene is located in Houston County and was taken during the summer of 2011. The land values in both Houston and Fillmore counties is on the rise.

"Black gold" used to refer to oil wells, but if recent trends continue, the term could include productive soil, too. Area farmland prices, especially for prime tillable acres, rose substantially in 2011, according to reports from both Minnesota and Iowa.

In Fillmore County, tillable land will likely see a 20 percent rise in taxable market value from January of 2011 to January 2012, according to assessor Cindy Blagsvedt.

Houston County forecasts a 10 to 12 percent rise in tillable market value from one year ago, assessor Tom Dybing reported last week.

An annual survey from Iowa State University cites a 31.9 percent jump in Winneshiek County farmland values and 32.5 percent in Allamakee County. The statewide average for Iowa rose 32.5 percent, which is the highest yearly increase ever recorded by the survey, which began in 1941. The old record was set in 1979, prior to a disastrous crash in land values that left some producers "underwater" on high interest farmland loans. United States Department of Agriculture figures show the peak occurring in 1981, with 1987 marking a low point in Minnesota sale prices.

Currently, high commodity prices coupled with low interest rates are making productive land attractive to both producers and investors, Jerrold Tesmer said last week. Tesmer, who serves as University of Minnesota Extension educator for Fillmore and Houston counties, stated that commodity prices are closely tied to global demand, which could put producers who buy land at high rates in a risky situation.

"There have been some comparisons to the '80s, but the one big difference (now) is the lower interest rates," Tesmer said. "A second driver is the global economy. We are even more tied to what is happening overseas, especially China. If they stop buying, commodity (corn, soybean) prices would fall quickly. The other global danger is what is happening in Europe with several governments in financial stress.

"The situation we find ourselves in might be good for farmers who are retiring, but it's very hard on younger farmers who are trying to buy enough land to get started," Tesmer noted.

All farmers, not just those who are buying and selling, will be affected by higher land prices. Besides paying higher property taxes, higher land prices tend to force land rents higher, both Tesmer and Dybing said.

A 20 percent bump in market value doesn't translate to a 20 percent rise in taxes, Blagsvedt said, but, "It will shift taxes over to ag land, because that market value has increased much more than residential. Values on some residential parcels are going down... That will shift our county tax to the ag land. They will be taking on more of the taxes.

"There are many variables," Blagsvedt noted. "Who came on homestead (exemption), came off homestead? What did residential do? What is commercial doing?"

Dybing and Blagsvedt also said that another consequence of higher market value is that some landowners will now find themselves pushed beyond the ag homestead limit, above which the taxable rate increases. For 2012, that number is $1,290,000, up from $1,210,000 in 2011. That might sound like a lot of money, but when the value of ag buildings is added to land in the $4,000 per acre range, the threshold is reached before a typical farm gets above 250 to 300 acres, they noted.

Dybing said the first $1,290,000 would be taxed at the homestead rate (one half of one percent), while all real estate beyond that amount will be taxed at one percent.

Rural vacant land, also classified as "woods and waste," will probably drop by 8 to 12 percent, Dybing said. That's because sales for recreational pursuits are off.

Historically, land has been a solid investment, in spite of the '80s bust. One of the most inclusive studies done in Minnesota, by U of M economist Steven J. Taff, covers 52,319 real estate sales from 1990 to 2010. Southeastern Minnesota saw a median price (on 56,169 acres sold), of $806 in 1990. Only 10,611 acres were recorded in 2010 sales, but they averaged $4,006.

Prime farmland (Class A soils) in Fillmore County rose from $1,530 per acre in 1998 to $4,000 at the beginning of 2011.

Houston County utilizes a different system called "crop equivalent rating," to classify land, but sales averaged $3,010 for typical (70 percent CER) tillable land at the beginning of 2011. That compared to $1,085 for 70 percent CER land in 2001. The best Houston County acres (100 percent CER) averaged $4,300 in January of 2011, up from $1,550 in 2001.

Those are averages only. Two Fillmore County land auction parcels sold in December of 2011 for $6,400 and $6,600 respectively. Blagsvedt said the top price paid for a Fillmore County farmland parcel in 2011 was $8,000 per acre. Houston County had a $5,700 per acre sale in 2011, and has already topped that with a $5,900 per acre sale in January of 2012, Dybing noted.